A Wise Move: Saving When Sending Abroad

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At a party in London in 2007, Estonians Kristo Käärmann and Taavet Hinrikus were sharing their frustrations. Taavet Hinrikus was being paid in euros but lived in the UK, so needed pounds. Kristo Käärmann, meanwhile, had a salary in pounds, but a mortgage in Estonia, so needed Euros.

They both found the process of moving money internationally to be expensive, time-consuming, and lacking in transparency – banks were not forthcoming about their fees, and so the amount of money that would end up on the other side was somewhat of a guessing game.  

Both from a computer science background, they saw this arduous process as a “huge host of engineering problems” that decades of underinvestment precluded banks from solving. And so they got to work. What began as two friends meeting each other at the mid-market exchange rate to limit fees, is now Wise, a global fintech platform enabling faster, cheaper, international money movement.

In the final session of Scottish Mortgage’s inaugural digital conference, deputy manager Lawrence Burns was joined by Kristo Käärmann, co-founder and chief executive of Wise.

Scottish Mortgage first invested in the company in 2016 when, then named Transferwise, it was a private company. Since then, progress has been extraordinary. Renamed Wise in 2021, it has 30 million customers and operates in 160 countries and 40 currencies.

In 2016, it handled £7bn in cross-border volume annually. In the last financial year, that rose to £118bn. The company has improved profitability, reducing its fees as it scales up, and has its sights set on moving £1tn annually in the future.

Valuing its customers

For comparison, banks typically charge 2.7 per cent for major currencies and nearly 10 per cent for less mainstream currencies.

Wise’s average fees across all routes and payment methods are around 0.64 per cent. Major currencies can sometimes be less than 0.3 per cent.

“Every day, we’re trying to work out how to serve more people and use cases and make Wise more useful for more customers,” says Käärmann. This customer-centric approach is fundamental to their culture: “We've been very clear to ourselves, that the more value we create for our customers, the more valuable is the company that we’re creating.”

From the rapid growth of the company, it’s clear it is providing something new and better for consumers. However, oftentimes when a company disrupts an established industry, incumbents adapt to try and keep up. But Kaarmann has been surprised to see that not much has changed. The market remains inefficient. “The same opportunity we worked on five years ago hasn’t moved much. Consequently, we are very much at the beginning [of expanding our market share].”

Instead of banks improving their own offering, they have been encouraging their own customers to use Wise. Käärmann remembers the company investigating a sudden spike in Hungarian users. It transpired that managers at a small Hungarian bank had been showing branch customers how to open a Wise account to transact international money transfers rather than via their bank.

This became the inspiration for the Wise platform that now offers its services beyond the retail market. “We open this infrastructure that we've been building for our [retail] customers to all the banks and other institutions in the world so they can get the same experience.”

That’s a win-win for customers, banks, and Wise, says Käärmann.

In addition to removing friction from individuals’ cross-border payments, it increasingly provides solutions for small businesses, such as international invoicing.

“People and businesses hold about $16bn in funds on their Wise accounts. That brings new opportunities and challenges and simultaneously expands our market.”

“The infrastructure that we’re building up, or that we've built and will build puts us in a unique position where no one else can move funds with that efficiency globally.”

Today, “65 per cent of payments arrive in less than 20 seconds in the recipient's account on the other side of the world… That was not possible and that’s not possible under the old technology”.

The case for growth

Our investors focus on long-term growth opportunities, and often this means companies that prioritise investing in the long-term offering for its customers over delivering short-term returns to its financial backers.

Käärmann recognises the value of aligned shareholders: “We have Scottish Mortgage or Baillie Gifford funds who are very long term and they’re very aligned in the [goal of] ‘How do we get to the next trillion [of transfers]?’”

This long-term view enables “the fundamentals of what we’re investing in, how we’re investing in it, and what we’re building remains intact.”

Wise’s growth opportunity remains vast. According to its estimates, it serves roughly 4.5 per cent of the world’s international transfers by volume for individuals. For small businesses, it is approximately between only 0.5 and 1 per cent.

Käärmann suggested the cross-border payments market is over $10tn, of which individuals make up between $2 and $4tn and small- and medium-sized enterprises about $9tn. He hopes continued investment will move the company towards a trillion-dollar volume.

Making a difference

Wise saves its customers between £1.6bn and £2bn a year. “We take pride in that,” he says.

That is why it is transparent about its fees and informs the customer if there's a cheaper route elsewhere. It keeps the company striving to do better for its customers.

“Of course, we will try to change that so that no one is cheaper. But what do we have to lose? At least the customer trusts us and will return next time to check. And hopefully, next time, we’re going to be better.”

With its sights set on expanding its market share and continuing to disrupt the traditional banking sector, Wise is poised for further success.

The company’s progress underscores the power of innovation, customer focus, and strategic growth for Scottish Mortgage’s shareholders. The Trust has accompanied Wise on its journey of turning one man’s frustration into the foundation of global fintech leadership.